What are the merits and demerits of Joint Stock Company?

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The company form of business ownership has become very popular in modern business on account of its several advantages:

1. Limited liability:

Shareholders of a company are liable only to the extent of the face value of shares held by them. Their private property cannot be attached to pay the debts of the company. Thus, the risk is limited and known. This encourages people to invest their money in corporate securities and, therefore, contributes to the growth of the company form of ownership.

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2. Large financial resources:

Company form of ownership enables the collection of huge .financial resources. The capital of a company is divided into shares of small denominations so that people with small means can also buy them.

Benefits of limited liability and transferability of shares attract investors. Different types of securities may be issued to attract various types of investors. There is no limit on the number of members in a public company.

3. Continuity:

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A company enjoys uninterrupted business life. As a body corporate, it continues to exist even if all its members die or desert it. On account of its stable nature, a company is best suited for such types of business which require long periods of time to mature and develop.

4. Transferability of shares:

A member of a public limited company can freely transfer his shares without the consent of other members. Shares of public companies are gener­ally listed on a stock exchange so that people can easily buy and sell them. Facility of transfer of shares makes investment in companies liquid and encourages investment of public savings into the corporate sector.

5. Professional management:

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Due to its large financial resources and continuity, a com­pany can avail of the services of expert professional managers. Employment of profes­sional managers having managerial skills and little financial stake results in higher efficiency and more adventurous management benefits of specialisation and bold man­agement can be secured.

6. Scope for growth and expansion:

There is considerable scope for the expansion of business in a company. On account of its vast financial and managerial resources and limited liability, company form has immense potential for growth. With continuous expansion and growth, a company can reap various economies of large scale opera­tions, which help to improve efficiency and reduce costs.

7. Public confidence:

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A public company the confidence of public because its ac­tivities are regulated by the government under the Companies Act. Its affairs are known to public through publication of accounts and reports. It can always keep itself in tune with the needs and aspirations of people through continuous research and develop­ment.

8. Social benefits:

Company form of organisations has helped increase production and improves living standards of people. It has generated employment for a large number of persons.

It has improved quality of goods and reduced prices. Company organisation has contributed tax revenues for the Government and has helped the growth of profes­sional management. In this way joint stock company has helped to improve the quality of life all over the world.

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Demerits:

A joint stock company suffers from the following weaknesses:

1. Legal formalities:

Formation of a company is a time-consuming and expensive pro­cess. Too many legal formalities have to be observed and several legal documents have to be prepared and filed. Delay in formation may deprive the business the momentum of an early start.

2. Lack of motivation:

The directors and other officers of a company have little personal involvement in the efficient management of a company. Divorce between ownership and control and absence of a direct link between effort and reward lead to lack of personal interest and incentive it is difficult to keep personal touch with customers and employees. As a result, efficiency of business operations may be low.

3. Delay in decisions:

Red tape and bureaucracy do not permit quick decisions and prompt action. There is little scope for personal initiative and a sense of responsibility. Paid employees like to play safe and tend to shift responsibility. There is lack of flexibility of operations in a company.

4. Economic oligarchy:

The management of company is supposed to be carried on ac­cording to the collective will of its members. But in practice, there is rule by a few (oligarchy). Often directors try to mislead the members and manipulate voting power to maintain and perpetuate their control.

The shareholders become mere pawns in the game of a small clique or coterie of directors. Shareholders are often ignorant and indifferent about the working of a company. Therefore, they fail to exercise their voice in the functioning of the company.

5. Corrupt management:

In a company, there is often danger of fraud and misuse of property by dishonest management. Bogus companies may be formed to deprive the investors of their hard-earned money.

Unscrupulous people may manipulate annual accounts to show artificial profits or losses for their personal gain. The South Sea Bubble case is the most famous example of how corrupt office-holders may exploit shareholders for selfish gain.

6. Excessive government Control:

At every stage in the management of a company, there are legal rules and regulations. Several legal provisions have to be followed and reports have to be filed. Such legal interference in day-to-day operations results in lack of secrecy. A lot of time and money are spent in complying with statutory requirements.

7. Unhealthy speculation:

The shares of a public company are dealt in on a stock ex­change. The prices of these shares fluctuate depending upon the financial health, divi­dends, future prospects and reputation of the company.

Directors of a company may indulge in speculation on the basis of inside information for their private gain and at the cost of small investors. Company organisation may also lead to concentration of economic power in a few hands.

8. Conflict of interests:

Company is the only form of business wherein a permanent con­flict of interests may exist. In proprietorship there is no scope for conflict and in a partnership continuous conflict results in dissolution of the firm. But in a company conflicts may continue between shareholders and board of directors or between share­holders and creditors or between management and workers.

9. Lack of secrecy:

Under the Companies Act, a company is required to disclose and publish a variety of information on its working. Widespread publicity of affairs makes it almost impossible for the company to retain its business secrets. The accounts of a public company are open for inspection to public.

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